NZ dollar falls then recovers on rate cut move

The New Zealand dollar fell when the Reserve Bank  cut the official cash rate (OCR) by 50 basis points to 2.5% but recovered much of the ground it lost. Dealers said that while lower interest rates were a negative for the currency, the cut was widely anticipated and the market had factored it in.

The NZ dollar, which had been trading around 73.92USc before the 9am announcement, immediately dropped to 73.31USc but recovered to 73.60USc by 5pm. It was 73.89USc at 5pm yesterday.

While the central bank is expected to keep the cash rate unchanged for most of this year, economists are focusing on inflation pressures and the idea that rates will eventually have to rise again to contain inflation.

"It will only be a matter of time before the market starts to speculate on when the increases are going to come, because with 4% inflation and higher food and oil costs the argument to cut was flimsy anyway," said Derek Rankin of Rankin Treasury.

Speculators had pushed the NZ dollar down. Importers were not doing a lot of business at the moment, so exporters currently had more influence in the currency market.

"Kiwi is struggling to go down," Mr Rankin said.

Deutsche Bank said the NZ dollar was a little weaker.

"Looking ahead, we think it is important to keep an open mind on future policy settings given the significant uncertainty that surrounds the economic outlook," it said. "While we think that policy is now likely on hold for the remainder of this year, we can't rule out the possibility that a modest re-tightening takes place late this year if today's policy action and those put in place by the government result in a swifter upswing than presently seems likely."

The Australian dollar fell on jobs data but quickly bounced back. It has been outperforming the NZ dollar since the Christchurch earthquake. The NZ dollar was at 73.17Ac at 5pm after dropping from 73.05Ac to 72.92Ac on the rate cut. It was 73.30Ac at 5pm yesterday.

It was at €0.5303 from €0.5319 yesterday and at ¥60.95 from ¥61.17 yesterday.

The trade weighted index dropped to 65.17 from 65.40 yesterday. The two-year swap rate fell nine basis points to 3.29% over the day, but longer-term rates moved by less, leaving a steeper yield curve.